MANAGEMENT DISCUSSION AND ANALYSIS ECONOMIC OVERVIEW & COMPANY PERFORMANCE Economic Overview The year 2014 had been very eventful as far as India is concerned, with the first ever single party majority Government formed at the centre since 1984. This is likely to provide impetus and stability to the Indian economy which registered lower Gross Domestic Product (GDP) growth in the past few consecutive years due to policy paralysis. There have been some initiatives taken by the Government to accelerate growth which are yet to yield results. The halving of global oil prices since mid-2014 allowed the new Government to raise diesel and petrol fuel taxes and cut diesel prices by 20-25 per cent - a windfall gain for households as well as businesses and dampening inflationary brssures in the economy. As per the new GDP data released by Central Statistics Office, the country grew 6.9 per cent in 2013-14. For 2014-15, the GDP growth rate is pegged at 7.4 per cent. The Finance Minister, while brsenting the full budget, indicated GDP growth to accelerate between 8 and 8.5 per cent in the fiscal year starting April 2015. The global economy is still struggling to gain momentum as many high income countries continue to grapple with legacies of the global financial crisis and emerging economies are less dynamic than in the past. Global growth in 2014 was a modest 3.4 per cent lower than initially expected, continuing the disappointing trend over the past several years. US Economy is well on its recovery path owing to good labour market and monetary policy, but in Europe the growth remains sluggish. China, meanwhile, is undergoing a carefully managed slowdown. The growth in other developing countries reflected weak external demand, domestic policy tightening, political uncertainties and supply-side constraints. Oil prices during this year significantly came down from its highs owing to demand shift towards Shale oil. Shale oil and gas is rapidly emerging as a significant and relatively low cost unconventional resource in the US. The American domestic energy revolution has contributed to a significant decline in petroleum imports and led to an improvement in America's balance of trade and its economic outlook. With high shale oil and gas reserves estimated across the world, there is potential for shale oil and gas production to sbrad globally over the next couple of decades and revolutionise global energy markets. The Russian economy witnessed unbrcedented challenge owing to Ukraine-Russia political standoff and the lowering of crude oil price. This led to significant devaluation in Rouble. On the financial side, the interest rate in India continued to be constant for most part of the year. Consumer Price Index (CPI) and Wholesale Price Index (WPI) continued to fall during the course of the year which prompted RBI to reduce the Repo rate by 50 basis points in the last quarter of 2014-15. Banks in line with RBI have started easing the interest rates. The Rupee continued to move in the range of 61-63 against the US dollar for most parts of the financial year. However, against Euro there was a sharp apbrciation of the Rupee. Fiscal deficit target for 14-15 at 4.1 per cent of GDP is expected to be met as detailed by the Finance Minister in the budget. Company Performance Revenues The standalone business grew at 2.1 per cent on the back of growth in Abrasives and Ceramics business. Electromineral business de-grew on account of lower Fused Alumina sales. Capex postponement, moderate customer demand from user industries, competition from low price products, power rate hike and tight liquidity in trade resulted in weak demand. The Company's consolidated revenue from India increased by 3.9 per cent and from rest of the world dropped by 11.2 per cent resulting in the worldwide revenues dropping by 3.6 per cent from last year levels. At a consolidated level, the sales of Ceramics business grew by 2.3 per cent whereas that of Electrominerals segment dropped by 10.2 per cent owing to translation on account of weak Rouble. Abrasives sales at a consolidated level remained flat. Manufacturing Most of the plants in India operated at about 70 per cent capacity utilisation levels. The manufacturing team continued implementation of Total Productive Maintenance (TPM) at shop floors leading to improvement in efficiency of machines and the entire production process. Notwithstanding lower fuel rates, the manufacturing cost went up owing to the hike in power cost in Russia and India and select raw material inputs. The cost brssures were contained by way of using alternate cost effective raw materials, improvement in raw material consumption and process improvements. Various value adding, cost cutting and productivity improvement projects were undertaken to minimise the impact on the operating profits despite lower plant utilisation. Capital expenditure during the year across all geographies was in the nature of maintenance, automation, quality enhancement, line balancing and general infrastructure. Earnings & Profitability Aided by the growth in revenues, standalone earnings from operations before exceptional items, interest, debrciation and tax improved to - 1490 million (brvious year - 1450 million). Debrciation was higher at - 588 million as a result of the continuing investments being made in various projects and changes in useful life of assets in line with Companies Act, 2013. Profit before interest and tax margin expanded for Abrasives and Ceramics, but were lower for Electrominerals owing to lower topline and higher power costs. Finance costs were lower at - 87 million (brvious year - 129 million) owing to reduction in quantum of borrowings. Profit before tax and exceptional income increased to - 1125 million (brvious year - 1024 million). With an exceptional income of - 869 million, profit before tax for the year was at - 1994 million. Profit after tax was - 1483 million (brvious year - 728 million). On a consolidated basis, profit before expectional item and tax was - 1639 million (brvious year - 1543 million). Profit after tax and minority interest was - 1326 million (brvious year - 915 million). Segmental profitability improved for Ceramics, however it dropped for Abrasives and Electrominerals. In Electrominerals, profits dropped due to one-time closure cost of Thukela Refractories Isithebe Pty Ltd., South Africa and the weakening of Rouble. Information required to be provided in the Management Discussion and Analysis Report as per the Listing Agreement is detailed below: Financial Position On a standalone basis, shareholders funds as on 31st March 2015 was - 8599 million. Additions for the year (net of dividends) was - 1263 million. Non-current liabilities was - 970 million. Current liabilities decreased from - 2114 million to - 1887 million. Non-current assets (including fixed assets, capital work-in-progress etc.) increased from - 5764 million to - 6629 million primarily on account of capital expenditure incurred during the year. Current assets were higher at - 4826 million. On a consolidated basis, shareholders funds as on 31st March 2015 was - 10887 million. There was a decrease (net of dividends) to the extent of - 173 million, mainly due to exchange effect majorly led by Rouble debrciation. Minority interest was - 578 million. Non-current liabilities was - 1110 million. Current liabilities was at - 5675 million. Non-current assets (including fixed assets, capital work-in-progress, etc.) decreased from - 9784 million to - 8786 million due to an adverse exchange movement. Current assets decreased to - 9465 million. Cash Flow On a standalone basis, net cash generation from operations was - 1056 million in FY 2014-15. Net cash outflow on account of investing activities was - 532 million. Net cash outflow on account of financing activities was - 574 million which is attributable primarily to repayment of borrowings and dividends paid. The net decrease in cash and cash equivalents was - 50 million against an increase of -28 million in FY 2013-14. On a consolidated basis, net cash generation from operations was - 3258 million in FY 2014-15. Net cash outflow on account of investing activities was - 70 million. Net cash outflow on account of financing activities was - 1615 million which is attributable primarily to repayment of borrowings and dividends paid. The net increase in cash and cash equivalents was - 282 million against a decrease of - 57 million in FY 2013-14. SHARE CAPITAL The paid up equity share capital as on 31st March 2015 is - 188.18 million and increased during the year by - 0.42 million, consequent to allotment of shares upon exercise of stock options by employees under the Company's ESOP Scheme, 2007. DIVIDEND Considering the past dividend payout ratio and the current year's operating profit, the Board has considered it appropriate to recommend a final dividend of - 0.50 per equity share of - 1 each. It may be recalled that in January 2015, an interim dividend at the rate of - 0.75 per equity share of - 1 each was declared and paid. This aggregates to a total dividend of - 1.25 per equity share of - 1 each for the year, which is the same as last year. Rebrsents dividend and dividend tax of - 56454 on 96506 equity shares allotted under the ESOP Scheme 2007 to the employees, subsequent to the date of approval of the annual accounts by the Board and before the book closure date. PERFORMANCE OF BUSINESS SEGMENTS The business profile, market developments and current year performance are elaborated in the following sections: Abrasives Business Profile This business comprises the following major product groups viz. Bonded Abrasives, Coated Abrasives (including Non-Wovens), Super Abrasives, Metal working fluids and Power tools. The operations are carried out through thirteen manufacturing facilities located in India, Russia, China and Thailand. The marketing entities located in North America and Middle East support this business in getting an extended customer reach. Abrasives are used in a wide spectrum of industries, the key among them being automobile, engineering, fabrication, wood working, construction, home maintenance and infrastructure. The Company caters to customers located in over fifty countries through its network of manufacturing facilities and marketing establishments. It is one of the major players in India and Russia. Industry scenario The global industry continues to be led by few players who have a complete portfolio of Abrasive products. There are also a large number of players specialising in specific categories of Abrasives. The Indian Abrasives industry continues to be catered to by a few large players, numerous smaller players specialising in select products and imports from China catering to the low end of the market. Due to the soft market conditions in many advanced economies, India is becoming a focus market for major global players resulting in intense competition. The market is getting increasingly crowded by overseas competition and low cost imports from ASEAN countries. In the domestic Russian market there are three major players. The Company is a major player in Vitrified Bonded Abrasives. Imports service a sizeable portion of the market. The world Abrasives market which is currently valued at ~US $36 billion is estimated to reach $51 billion by 2019 according to Transparency Market Research. North America and Europe together accounts for 50-55 per cent of the Abrasives consumption followed by China with 17-20 per cent. The Indian Abrasives market size is estimated to be in the range of - 60000 million plus. There was no major change in the industry structure during the year. Sales Overview Abrasives business on a standalone basis recorded a growth in revenue from - 6399 million to - 6689 million, a growth of 4.5 per cent. The growth largely came from better performance in exports, improvement in the sales of select resinoid product categories in domestic market and focused efforts on branding. Introduction of high performance grains from the Company's captive Electrominerals facility also fuelled the growth. In Bonded Abrasives, the sales of standard products remained flat. The mass market products which are mostly sold through channels were impacted due to liquidity issues. Consequently off-take from end user segments and trade channels were moderate. However on the back of value projects initiative, despite an unfavorable macro-economic environment, the non standard business delivered better performance. Sales in Power tools business which had a good run over the last few years, corrected in this year owing to tightening of credit limits to dealers with higher outstandings. Coated products delivered a significant growth in this year on the back of better exports and launch of technical products. All the product categories, majorly sheets & rolls and technical goods had good sales. Non-Woven products also registered a growth over last year. In Non-Woven business, the focus during the year was on increased participation in the industrial segment and development of new products. Continued marketing activities involving various partners helped CUMI Abrasives division to remain competitive in the market ahead of its peers. In Russia, due to the geo political situation, sales of the Abrasives business dropped during the year. CUMI China recorded a drop in sales as well. Wendt (India) and Sterling Abrasives recorded a good growth on the back of improvement in volumes from auto & auto ancillary business and agriculture business respectively. Manufacturing Manufacturing supported the marketing initiatives well in terms of timely delivery. Significant number of value projects, tailored to meet cost reduction through improvement in material efficiencies, energy cost reduction, labour productivity improvements and maintenance efficiencies were undertaken and completed during the year. As a result of these value projects and other cost control initiatives, the Abrasives business recorded an increase in profit on a standalone basis. This year, the division achieved a significant milestone in Total Productive Maintenance (TPM) journey which commenced in 2012-13. In March 2015, the Sriperumbudur and Maraimalai Nagar plants of the Company were awarded the TPM Award for Excellence - Category "A" by Japan Institute of Plant Maintenance (JIPM). The implementation has been now extended to other Abrasives facilities. TPM initiatives have helped in enhancing equipment effectiveness, debottlenecking various constraints in the production process thus releasing additional capacity and reduction in lead time of production. The Coated business has significantly benefitted from this initiative resulting in growth in profit. The marketing and technical functions of the division worked jointly on a detailed action plan, with focus on introduction of high-performance products using captive Electromineral division's specialty grains, to maintain competitive edge in the market place. Ceramics Business Profile The Ceramics business has three product groups viz. Industrial Ceramics, Super Refractories and Anticorrosives. Industrial Ceramics business offers Alumina and Zirconia products of technical ceramic grades addressing wear protection, electrical insulation, thermal protection and ballistic protection applications. The Super Refractories product group supplies fired, monolithic, flow control products, POW wellfiller and fibre as also refractory design and installation services addressing the insulation and thermal resistance requirements of industries. The refractory fibre, refractory design and installation businesses are addressed through our joint ventures Murugappa Morgan Thermal Ceramics Limited and Ciria India Limited. The Anti-corrosives product group offers acid resistant cements, polymer concrete cells and various other products addressing the anticorrosion requirements of industries. The key user industries for Ceramics business are power generation and transmission, coal washeries, grain handling, sanitary tiles and sanitary ware, ballistic protection, cement, non-ferrous metals, iron and steel industries, carbon black, insulators, furnace building, glass, petrochemicals and construction. The operations are carried out through twelve manufacturing / service facilities located in India, Australia, South Africa and Russia. The subsidiaries in North America, Middle East and China also support this business in getting an extended customer reach. The Company is one of the major players in India, Australia and Russia in specific product groups. Industry scenario There has been no material change in the Ceramics industry structure in India, which is catered to by a few major players. CUMI is a globally reputed and a leading player in certain market segments. In Australia, CUMI is one of the major players in the lined equipment and mineral processing industry. The Refractory industry in Russia is a highly fragmented market with several players. Volzhsky Abrasives Works (VAW) caters primarily to the aluminium industry in Russia. Sales overview Revenues of the Ceramics business grew by 2.9 per cent, on a standalone basis from - 3057 million to - 3146 million. The Industrial Ceramics division had a reasonable growth on the back of significant increase in domestic business. The division was able to execute good orders for Wear Ceramics with resumption of some of the deferred projects in 2013-14, especially in the Power sector. The business in Lined Equipments from Australian market continued to be good, with increasing complexity of sizes and shapes. The Metz device supplies to international customers of fuel cells had a correction owing to shift in demand patterns. Off- take of Metallized cylinders from European customers were lower, however the broad basing of customers initiated in the past few years ensured higher sales of Metallized cylinders. Sales of Wear Ceramics in the US and European market were marginally lower than the expectation. In 2014, the Company inaugurated a production line for making new line of Engineered Ceramics parts. Turnover of the Refractories business in India declined due to lower off-take of fired products. The order inflow from the projects segment, particularly iron and steel, dropped sharply. Sales of Anticorrosives registered a sharp drop due to delay in execution of project orders. Sales of refractory fibre by the Company's joint venture, registered a good growth amidst a tight market. The Refractory design and installation services business, which is also addressed through a joint venture, recorded growth in sales owing to recovery in project environment in Petrochemical industries from a low base last year. In Russia, Nitride Bonded Silicon Carbide refractories registered a drop. This business is largely tender driven and is dependent on the non-ferrous industry. Sales of Refractories in South African subsidiary were lower than last year as the expected order inflow from select customers were postponed. The capacity utilisation remained below optimum. In view of the increasing input costs and considering future viability, it was decided to wind down the operations in Thukela Refractories Isithebe Pty Ltd. Manufacturing Efforts on 5S and TPM contributed towards keeping the variable costs under control. The TPM initiative has nicely been entrenched in the division. Debottlenecking projects in metallized plant led to release of capacity in the existing facility. The robust systems that has been designed in the Ceramics division is being well recognised by customers and the audit scores are the testimony of the Company's consistent, timely and cost effective supplies. This year, the new building, which will house extrusion & injection moulding facility and other Ceramics products were capitalised. The initiatives for controlling costs provided savings in fixed costs including marketing expenses. The Refractories division commissioned the alternative fuel fired tunnel kiln, which is expected to give a cost saving. Electrominerals Business Profile The major product groups of this segment are Fused Alumina (comprising brown and white Alumina), Silicon Carbide, Fused Zirconia, Alumina Zirconia and Zircon mullite. The Company also manufactures a range of 'specialities' like semifriable, Azure-S and plasma powders for niche markets. The operations are carried out through seven manufacturing facilities located in India, Russia and South Africa. Key user industries for this business are abrasives, refractories, steel, photovoltaic, brake linings, nuclear energy, wooden laminates, semiconductor and others. The business also has captive bauxite mines, sand mines and a captive power plant. Industry Scenario The market structure in the global Electrominerals business remained largely unchanged and the Company continues to be one of the reputed players in Silicon Carbide and Fused Zirconia. In Fused Alumina, the Company is largely a national player with customers based in India. Apart from the domestic players, imported products have a visible share in the market. Competitive imports become favorable or unfavorable depending on FTA agreements between countries, duty structures and exchange rates. Sales Overview The Electrominerals business recorded revenues of - 2338 million, which was 2.9 per cent lower compared to last year standalone revenues of - 2408 million. The sale in India dropped marginally owing to the lower Alumina sales. At a consolidated level the drop was higher at 10.2 per cent from - 8099 million to - 7275 million. The drop happened majorly on account of exchange translation into Indian Rupee. In the Fused minerals operations in South Africa, which was acquired during the second quarter of FY 2012-13, capacity utilisation continued to be lower for most parts of the year coupled with insufficient off-take from key customers and production consistency issues. Considering the decision taken to wind down operations, the fusion plant operations of Thukela Refractories, were mothballed. The two furnaces meant for fusion will be relocated to Edapally plant in India. The Bubble Zirconia sales in Foskor Zirconia were impacted owing to continued production related challenges. Hence, the Company has decided to shift the Bubble Zirconia facility from South Africa to Edapally, India and integrate the operation with Electromineral business in India. The Fused Zirconia sales tonnage however had a reasonable growth. Notwithstanding the Ukraine crisis and oil price turmoil, the performance of Silicon Carbide division of VAW continued to be robust. The facility ran at full capacity for almost the entire year and turnover grew by 7 per cent. However on conversion of Rouble to Indian Rupee, the cross currency rates had an adverse effect. The Company has set up a marketing subsidiary, based out of Europe, to serve the European markets better. Manufacturing The Indian operations had to grapple with higher power cost owing to tariff increase from Kerala State Electricity Board from August 2014. The division explored successfully the option of sourcing power from open access which provided some savings. Maniyar generation was also lower by 15 per cent considering the brvious year rainfall which was one of the best in recent years. Both raw material availability and price were optimised to get savings in cost and ensure future security to meet expansion needs. The recovery improved for certain grit sizes. Semifriable grains registered a sharp growth. In Russia, the Silicon Carbide fusion facility registered highest fusion volumes ever. The Russian entity continued to flex its manufacturing process to generate more metallurgical products to serve its domestic market. The power rates in 2014-15 went up by about 8 per cent. The cost upsurge was negated to some effect by way of effective sourcing of raw materials. In South Africa, the Bubble Zirconia continues to have issues pertaining to stabilisation of the manufacturing process and product establishment. As a result of lower volumes and increase in power tariff coupled with lower captive power form Hydel facility, the Electrominerals business recorded a drop in operating profit before interest and tax on a standalone basis. However, at a consolidated basis, the profits grew by 1.6 per cent owing to better performance in VAW. FINANCE During the year, the Company generated - 1056 million of cash surplus from its operations on a standalone basis. All debts have been serviced on time. The Company's long term debt position as on 31st March 2015 stands at - 512 million and total debt position stands at - 835 million. The capital expenditure program of - 405 million was financed largely from internal accruals. CUMI standalone had an exceptional income of - 869 million due to sale of non core immovable property. The proceeds were invested in its wholly owned subsidiary, CUMI International Limited (CIL) and utilised entirely for repayment of its loans. The standalone loan funds has come down from - 1188 million to - 835 million. The consolidated loan funds has come down from - 4563 million to - 3402 million. The consolidated capital expenditure was - 796 million. The credit ratings of the Company, 'A1+' for short-term borrowings and 'AA+Stable' for long-term borrowings, were reaffirmed by CRISIL. Over the years, the Company has been resorting to a prudent mix of rupee and foreign currency borrowings to finance its operations and achieve reduction in financing cost. The finance cost at a standalone level has come down from -129 million to - 87 million. At a consolidated level, the interest costs has come down from - 282 million to - 253 million. With the Indian entity enjoying a significant natural hedge, a cautious approach was adopted to hedge the remaining exposures. The Company adopts prudent tax management policies. The Company's debt equity ratio continues to be healthy and is the lowest in the last decade at 0.1 on a standalone basis and 0.3 on a consolidated basis. There are no material changes and commitments, affecting the financial position of the Company which have occurred between 31st March 2015 and the date of this report. INTERNAL CONTROL The Company has an Internal Control System commensurate with the size, scale and complexity of its operations. The Controls have been designed and categorised based on the nature, type and the risk rating. The Internal Audit team evaluates the effectiveness and adequacy of Internal Controls, compliance with operating systems, policies and procedures of the Company and recommends improvements, if any. Significant audit observations and the corrective/ brventive action taken or proposed to be taken by the process owners are brsented to the Audit Committee. Annual review of the adherence to the agreed action plan is carried out. The scope of Internal Audit is annually determined by the Audit Committee considering the inputs from Statutory Auditors and management. Capital and revenue expenditure are monitored and controlled with reference to approved budgets. Investment decisions are subject to formal detailed evaluation and approval according to schedule of authority in place. Review of capital expenditure undertaken with reference to benefits forecasted is done. Physical verification of assets is periodically undertaken. The Audit Committee reviews the overall functioning of internal Audit on a periodical basis. The Committee also discusses with the Auditors periodically on their views on the financial statements including the financial reporting system, compliance with accounting policies & procedures and the adequacy / effectiveness of the internal control systems in the Company. ADEQUACY OF INTERNAL FINANCIAL CONTROLS The adequacy of Internal Financial Controls existing in the Company to ensure orderly and efficient conduct of its business, including adherence to the Company's policies, safeguarding of its assets, brvention and detection of frauds and errors, accuracy and completeness of accounting records and the timely brparation of reliable financial information is ensured by: ¦ Documentation of the risks and controls associated with the major processes; ¦ Validation and classification of existing controls to mitigate risks; ¦ Identification of improvements and upgrades to the controls; ¦ Improving the effectiveness of controls on residuary risks through data analytics; ¦ Performing testing of controls; ¦ Implementation of sustainable solutions to Internal Audit observations; The Audit Committee periodically evaluates Internal Financial Controls to ensure that they are adequate and operating effectively. HUMAN RESOURCES When the market demanded enormous flexibility owing to the unbrcedented challenges, the HR strategy offered the much needed support to business by putting tactical plans into action that were characterised by a high degree of agility to keep the focus right on long term goals. HR plans were directed by the six strategic imperatives - Building Leadership Pipeline, Scaling Up Capability across the organisation, Propelling Performance, Enhancing People Productivity, Improving Safety and Performing Social Responsibility. In addtion, an exercise has been embarked on to renew the vision of the Company. Building Leadership Pipeline Following the exercise of identifying high potential employees, succession and progression plan for leadership roles were conducted. During the year, many cross-functional and cross-SBU experiences and responsibilities were assigned to employees based on their potential. This workplace experience was also part of the development plan for these employees. A number of next generation managers were moved into leadership roles as part of this process. Individual development plan and discussions were conducted for most of the other employees as well. In 2015, review of the high potentials will be done to keep the talent pool relevant. The progression and succession pipeline will be revisited based on this review. In line with the methodology for identifying high potentials, the same model with dimensions of judgement, drive and influence are being used in talent acquisition across the Company. This has integrated a number of people processes that are primarily designed to acquire and nurture talent. Propelling Performance The performance management process is being strengthened to improve accountability of managers by establishing a compelling horizontal and vertical alignment across functions. An intensive performance planning exercise followed by rigorous reviews and feedback sessions helped the businesses to achieve this. Compensation practices were improved by establishing merit matrices to create a culture of competitiveness and pay-for-performance. There was a good amount of work in linking performance to individual rewards across the business units. To reinforce desirable behaviors, internal teams have mulled over revamping reward and recognition programs for various employee categories which is set to launch during the next year. People remain the key of all our actions and therefore our approach remains on creating an engaged and performing team fostered in a culture that respects emotional and rational priorities of people. We strengthened this philosophy through an employee engagement survey which was carried out across the Company and its subsidiaries in the month of April 2014. The survey has provided us with insights on leveraging managers and other critical drivers to improve employee engagement levels in the Company. This was followed by action planning for business units and more than 150 teams across the Company. The thrust on physical as well as value productivity through Long Term Settlements has helped the organisation in achieving efficiencies that could influence the whole value chain. With the changing times, the Long Settlements are giving way to annual wage increases which have become a mutually beneficial approach. A revamped communication framework, compliances and utilisation of interactive methods returned the organisation with a harmonising industrial climate. Improving Safety, Health and Environment Safety, Health and Environment have seen major improvement in terms of reduced incidents and consequent reduction in loss of man-hours. There was a coordinated effort on rectifying behaviours and conditions to make this happen. Business units continued to institute behaviour based safety practices with a common dashboard in place to measure the effectiveness of their actions. Training on safe work practices, right from the induction stage, has brought in a profound improvement in making the work environment a safe place. This was further substantiated when the Company scored a very high ranking on Safety in the employee engagement survey conducted in April 2014. A Safety Award by Department of Factories and Boilers, Government of Kerala on Electrominerals division was another recognition for our efforts towards making CUMI the best-in-class on Safety. The Company continues its commitment to employment and empowerment of women through 'MITR' forum and other initiatives. During the year, the Company has formalised its policy on brvention of Sexual Harassment at workplace in line with the requirements of the Sexual Harassment of Women at the Workplace (Prevention, Prohibition & Redressal) Act, 2013. An Internal Complaints Committee (ICC) has been set up to redress any complaint regarding sexual harassment and the Committee did not receive any complaints during the year. Performing Social Responsibility The CUMI Centre for Skill Development in Hosur is continuing its successful journey of honing skills and helping lives. Plans to replicate the same in Cochin is in progress. Social responsibility remains a high priority for the Company specifically on the focus areas viz., education, health and well-being of neighbouring communities of our facilities. All these segments have seen contributions from the Company in terms of financial support as well as employee volunteering efforts. A detailed report on the CSR initiatives is provided in a separate section in this report. Awards & Accolades Along with the challenges, the year has brought us a series of recognition for our efforts on people processes, practices on innovation and quality systems. Teams from Abrasives (Sriperumbudur and Maraimalai Nagar) who won the TPM excellence award travelled to Kyoto, Japan in March 2015 and received the brstigious award from JIPM on behalf of the Company. Electrominerals division was honored for Innovation Excellence by Kerala Management Association as a part of their Annual Management Excellence Awards. The Kakkanad unit won the first prize in CII 5S Excellence Award Competition under medium sector category in southern region held in December 2014. The Industrial Ceramics Division was awarded with "ABK-AOT 5S Sustenance Award" post the 5S Sustenance Audit carried out by ABK - AOTS in January 2015. Safety awards were won by many units during the year. Our employee engagement practices were awarded during the 11th Murugappa Group Best Practices Sharing Session. The total staff on rolls, of the Company (including joint ventures and subsidiaries) as on 31st March 2015 was 5020 with 3111 employees in India. (Previous year 4888 with 2883 employees in India) PERFORMANCE OF SUBSIDIARIES Volzhsky Abrasive Works, Russia recorded turnover growth over the brvious year from RUB 3248 million to RUB 3464 million due to improvement in sales volumes of Silicon Carbide and higher realisation due to exports. The entity had the highest ever fusion volumes. The sales of Abrasives and Refractories however dropped owing to weak user market conditions and postponement of project orders. On the profitability front, despite hike in power rate, the entity registered an increase in profitability (after tax) on the back of price gain from exports arising due to weak Rouble from RUB 321 million to RUB 356 million. Foskor Zirconia, South Africa recorded turnover of Rand 233 million compared to Rand 177 million last year. The entity incurred a loss of Rand 4 million at a profit after tax level versus last years loss of Rand 9 million. The Bubble Zirconia sales were impacted owing to continued production related challenges. Hence, the Company has decided to shift the Bubble Zirconia facility from South Africa to Edapally, India. The fused Zirconia sales tonnage however had a reasonable growth. CUMI Australia had a better performance considering lower sales last year and also uptick in market demand for Lined Equipment. Turnover grew from AUD 13.2 million to AUD 16.1 million. Profit after tax improved from AUD 1.3 million to AUD 1.8 million. With a turnover of - 636 million, Sterling Abrasives registered a good growth compared to last year sales of - 551 million. Profit after tax dropped from - 61 million to - 54 million on account of higher debrciation arising out of capacity expansion and the regulatory change in computation of the useful life of an asset. The user industry comprising majorly of agro polishing and manufacturing industry showed an improvement in demand. CUMI Abrasives and Ceramics Company, the Chinese subsidiary had a turnover of CNY 31 million for the year, which was lower than the last year's level of CNY 41 million. The loss was CNY 15 million against a loss of CNY 10 million in the last financial year. Lower off-take from CUMI group companies pulled down the performance. The turnover of CUMI America recorded a good growth (USD 4.4 million from USD 3.5 million), driven mainly by the increase in sales of both Bonded Abrasives and Industrial Ceramics. The losses were in the levels of USD 0.61 million as against loss levels of USD 0.5 million in FY 2013-14. Consequent to the consolidation of operations of CUMI Canada into CUMI America, CUMI Canada had no sales during the current year but incurred a loss of CAD 0.3 million (rebrsenting provision towards expected loss on disposal of land and building) which was lower than last year's loss of CAD 0.5 million. For CUMI Middle East, turnover de-grew from USD 2.5 million to USD 2 million owing to lower Ceramics business (projects based). Profits for the year reduced to USD 0.15 million from USD 0.2 million. In Cellaris Refractories India, the stabilisation process of the plant for manufacture of ceramic foam continued in FY 2014-15. Consequent to the acquisition of remaining shares in CRIL from Cellaris, Israel, this entity became a wholly owned subsidiary of the Company during the year. For administrative convenience, it is proposed to merge this subsidiary with the Company and necessary approvals in this regard are being sought. Southern Energy Development Corporation Limited, the gas based power generation subsidiary, recorded turnover of -186 million from - 154 million last year due to improved supply in gas from Oil and Natural Gas Corporation. Profits after tax grew from - 4.5 million to - 7.3 million. Net Access India, which provides IT facilities management and other allied services increased turnover by 15 per cent and achieved a turnover of - 252 million. Profits after tax grew from - 12.5 million to - 15.9 million. Thukela Refractories Isithebe, South Africa, recorded a turnover of Rand 77.3 million as compared to Rand 87.3 million last year. The loss levels including the one time closure costs were higher at Rand 55.1 million compared to last years' loss of Rand 35.6 million. The reason for deciding to wind down its operations has been earlier stated in the Report. CUMI International Limited, Cyprus recorded a turnover of USD 4.8 million rebrsenting mainly dividend income, as against last year income of USD 5.1 million. The reduction in dividend income was due to weakening of Rouble against US dollar. During the year the Company has, through CUMI International Limited (CIL) set up a marketing subsidiary, CUMI Europe s.r.o, based out of Europe, to serve the European markets better with products and services of CUMI Group. The entity is the process of commencing its operations. No company has ceased to be a subsidiary or joint venture or associate during the year 2014-15. Performance of joint ventures are given in note No. 42 of the standalone financials. Consolidated financial statements (incorporating the financial results of the company, its subsidiaries and joint ventures) have been provided in the Annual Report. Other than the joint ventures, there are no associate companies within the meaning of Section 2(6) of the Companies Act, 2013. A statement containing the key financial highlights of each subsidiary, based on the financial statements brpared by them under applicable local regulations for their respective financial years, is also attached. RISKS, CONCERNS AND THREATS Pursuant to the requirement of Clause 49 of the Listing Agreement, and the Companies Act 2013, the Company has constituted a Risk Management Committee. The details of Committee and its terms of reference are set out in the Corporate Governance Report forming part of this Report. The Company has a robust Business Risk Management process to identify, evaluate and mitigate risks impacting business including those which may threaten the existence of the Company. This framework seeks to create transparency, minimise adverse impact on the business objectives and enhance the Company's competitive advantage. This also defines the risk management approach across the enterprise at various levels including documentation and reporting. The framework has different risk models which help in identifying risk trends, exposure and potential impact analysis at a Company level as also separately for the business segments. Risk management forms an integral part of the Company's Business Plan. The key business risks identified by the Company and its mitigation plans are as under: Over the past few years the Company has acquired various technologies. Delay in successful conversion of the technology and application knowledge to profitable business model may lead to adverse impact on return on investments. Proper training of application team, collaborator's guidance, product validation at the user's end and leveraging the external expertise are some of the mitigating efforts the Company continues to pursue. The Company operates across various technology platforms and product verticals built over the years. Relative advantages and disadvantages of such technologies are studied and advances tracked. Any new technology may impact the performance of the Company in the long run. Such new technology in the related space as also in adjacencies is continuously tracked and monitored. The Company seeks to address these technology gaps through continuously benchmarking existing manufacturing processes with developments in the industry and in this connection has made arrangements with technical research institutions and technology consultants. The in-house research and development teams which have been strengthened over the earlier years are working on various state of the art projects. The Company manufactures various products which results in exposure to numerous raw materials. Risks associated with raw material availability, threat of substitutes and supplier concentricity could impact the quality and timely delivery of finished products. The risks are mitigated to include alternative sources after thorough testing and evaluation. Under utilisation of capacities may affect the performance of the Company going forward. The Company is ramping up its marketing efforts towards successful product establishment and market acceptance of the products, exploring development of alternate products and establishing a range of applications. Considering Electromineral products are produced by way of fusion process which consumes lot of electricity, power cost remains one of the key lever which can favorably or adversely affect our profitability based on the rate changes. Our manufacturing facilities are located in diverse geographies with differing power rates adopted and driven by the local laws and policies. Apart from pricing, in some locations, availability of power becomes a constraint. In order to mitigate this threat, the Company continues to liaise with the local regulatory bodies and local government. The Company also constantly strives to bring about technological changes in its manufacturing processes which leads to lower power consumption. Getting access to captive power and creating facilities for captive power generation continues to be the vital strategy of CUMI, as can be exhibited from Maniyar and SEDCO. Fuel cost increase is another area of concern. Petroleum based products are used, either as direct raw material or as fuel for the firing process. Any increase in the cost of fuel impacts the profitability adversely. Improvements in firing technologies are avenues which the Company continues to pursue for dealing with the challenges. This year, however the Company was favorably impacted owing to the global cool off in oil prices. The Company deals with multiple currencies and is thus exposed to translation risk on account of adverse currency movement. In the year 2014-15, CUMI consolidated financials was adversely affected on account of the Rouble weakening. The Company has taken steps to maximise exports from VAW in Russia to gain on a weak Rouble. Further to de risk and ensure continued growth in Europe region, the Company has set up CUMI Europe, a 100 per cent subsidiary marketing entity in Prague, Czech Republic. Foreign Exchange risk on foreign denominated loans, imports and exports are mitigated by adopting a country based Forex policy, periodic monitoring and use of hedging instruments. Efforts are being taken to manage both exports and imports to ensure that at a Company level there is a natural hedging mechanism. The Company's operations are sbrad across several countries. This exposes the Company to diversity in the policy approaches of governments in various countries as well as Geo political risks. In the last three years, the Company was exposed to three major country risks. First one, which impacted us significantly, was the scale back in subsidy to the photovoltaic industry in Europe in 2012-13. The second one, financial crisis in Cyprus in March 2013 alerted us but our timely actions protected us from any adverse effects. Lastly, the 2014 Ukraine crisis along with lower price of Crude oil led to weakening of Rouble which adversely impacted the consolidated Electromineral financials. The Company would be continuously scanning the environment to spot such trends early on, so that steps to mitigate the adverse effects can be initiated on time. BUSINESS OUTLOOK AND OPPORTUNITIES According to the World Economic Outlook - April 2015 of the International Monetary Fund (IMF), global growth is forecasted at 3.5 per cent in 2015, with uneven prospects across main countries and regions. Growth in emerging market economies is softening, reflecting an adjustment to diminished medium-term growth expectations and lower revenues from commodity exports, as well as country-specific factors. The outlook for advanced economies is showing signs of improvement, owing to the boost to disposable incomes from lower oil prices, continued support from accommodative monetary policy stances, and more moderate fiscal adjustment. The decline in oil prices could improve economic activity more than expected. Geo political tensions continue to pose threats and risks of disruptive shifts in asset prices remain relevant. In some advanced economies, protracted low inflation or deflation also pose risks. As per the Asian Development Outlook 2015, released on 1st April 2015, the initial phase of the new Government's effort to remove structural bottlenecks is lifting investor confidence. With the support of strong external demand, India is set to expand by 7.8 per cent in 2015 (ending 31st March 2016), a sharp uptick from 7.4 per cent growth recorded in FY 2014. This momentum is expected to build to 8.2 per cent growth in FY 2016, aided by the expected easing of monetary policy in 2015 and a pickup in capital expenditure. A revival in domestic growth would result in kick starting several postponed projects in steel, power, glass, cement, insulation and general engineering industry which would help the Company to register a good growth. The Company expects a good growth in revenue in the backdrop of positive macroeconomic factors considering favourable investment climate, perceived ability of new Government to push structural reforms like fast track clearance for infrastructure projects, GST, energy related reforms, controlled fiscal deficit and normalising of current account deficit. However, given the uncertain outlook, the Company will pursue growth with caution. Efforts will continue to be taken to control costs. Considering that the plants are running at lower utilisation levels and the fact that facilities have been expanded over the last years, the Company would invest majorly in maintenance capex. In addition the Company would be investing in relocation of assets from South Africa. With this approach, it is expected that the Company would deliver better results in the next year. FIXED DEPOSITS The Company has not accepted any deposits from the public falling within the ambit of section 73 of the Companies Act 2013 read with Companies (Acceptance of Deposit) Rules 2013 and no amount of principal or interest were outstanding as on the balance sheet date. Related Party Transactions The Company as per the requirements of the Companies Act, 2013 and clause 49 of the Listing Agreement with stock exchanges, has formulated a Policy for dealing with Related Parties. In line with its stated policy, all Related Party transactions are placed before the Audit Committee for review and approval. Prior omnibus approval of the Committee is obtained on a quarterly basis for transactions which are of foreseen and repetitive nature. The statement containing the nature and value of the transactions entered into during the quarter is brsented at every meeting by the Chief Financial Officer for the review and approval of the Committee. Further, transactions proposed to be entered in subsequent quarter are also brsented. Additionally the details of transactions proposed to be entered into with Related Parties on an annual basis are placed before the committee at the commencement of the financial year. Besides, the Related Party transactions entered during the year are also reviewed by the Board on an annual basis. All transactions with Related Parties entered during the financial year were in the ordinary course of business and on an arm's length basis. There are no materially significant related party transactions made by the Company with its Promoters, Directors, Key Managerial Personnel or their relatives which may have a potential conflict with the interest of the Company at large. There are no contracts or arrangements entered into with Related Parties during the year to be disclosed under sections 188 (1) and 134 (h) of the Companies Act, 2013 in form AOC-2. The Company's policy on dealing with Related Parties as approved by the Board has been uploaded and is available on the Company's website at the following link. <http://www.cumi-murugappa.com/> policies.html. None of the Directors had any pecuniary relationship or transaction with the Company other than the remuneration received in their capacity as Non-Executive or Executive Director. Corporate Social Responsibility The Murugappa Group is known for its tradition of philanthropy and community service. The Group's philosophy is to reach out to the community by establishing service oriented philanthropic institutions in the field of education and healthcare as the core focus areas. The Company being a constituent of the Group has been upholding this tradition by earmarking a part of its income for carrying out its social responsibilities. The Company continues to engage in Corporate Social Responsibility (CSR) activities directly as well as through implementation agencies. The Company has set up a CUMI Centre for Skill Development (CCSD) in year 2012 at Hosur, to build a skill bank of a technically competent and industry ready work force. The Centre provides specialised training based on National Council Vocational Training syllabus for the rural youth drawn from socially and economically backward sections of the society. The three year training is imparted with a stipendiary payment and free boarding facilities, thus enabling the enrolled students to earn while they learn. The job oriented skill training enhances their employability and aids in uplifting their socio economic status. The technically trained students can be employed by any industrial entity once they complete the training programme. It is proposed to expand this initiative to other plant locations in a phased manner. In addition, the Company has also been contributing to the cause of health and education by making grants to AMM Foundation, an autonomous charitable trust, engaged in philanthropic activities in the field of education and healthcare since 1953. The Company also pursues local community assistance programmes in and around its plant and office locations. With coming into effect of the CSR provisions in the Companies Act 2013, the Company has formulated a CSR policy which is available on the Company's website at the following link <http://www.cumi-murugappa.com/policies.html>. The Annual report on the CSR activities in the brscribed format is annexed hereto as Annexure A and forms part of this Report. GOVERNANCE Board of Directors and Key Managerial Personnel The Board of the Company comprises 8 Directors of which majority (6) are independent. During the year, Mrs. Bharati Rao, was appointed as an Additional Director on 1st November 2014 and she holds office till the date of the ensuing Annual General meeting. The Company is proposing to appoint her as an Independent Director under section 149 of the Companies Act, 2013 for a term of 4 years. Mrs. Rao has offered herself for this appointment. Mr. M M Murugappan, retires by rotation at the forthcoming Annual General Meeting and being eligible has offered himself for re-appointment. Further, based on the recommendation of the Nomination & Remuneration Committee, the Board at its meeting held on 29th January 2015, has re-appointed Mr. K Srinivasan as the Managing Director of the Company for the period 1st February 2015 to 22nd November 2017. Approval of the members is being sought at the ensuing Annual General Meeting for the appointment/ re-appointment of the aforesaid Directors. The requisite details in connection with their respective appointments are contained in the Notice convening the meeting. The Company has received declarations from all its Independent Directors confirming that they meet the criteria of independence brscribed both under the Companies Act, 2013 and clause 49 of the Listing Agreement. Mr. K Srinivasan, Managing Director, Mr. Sridharan Rangarajan, Chief Financial Officer and Mrs. Rekha Surendhiran, Company Secretary are the Key Managerial Personnel of the Company as per section 203 of the Companies Act, 2013. There were no changes in the KMP during the year. Board Meetings During the year, seven Board Meetings were held the details of which are given in the Corporate Governance Report. Board Evaluation During the year, as recommended by the Nomination and Remuneration Committee, an evaluation framework was adopted by the Board. Pursuant to the provisions of the Companies Act, 2013 and Clause 49 of the Listing Agreement, the Board carried out an annual performance evaluation of its own performance, the Directors individually as well as the evaluation of the working of its various Committees. Structured questionnaires were brpared, after taking into consideration the feedback of the Directors. The overall Board evaluation covered various aspects of the Board's functioning in terms of structure, governance, dynamics of functioning besides the financial reporting process, internal controls and risk management. The evaluation of the Committees were based on the terms of reference fixed by the Board. Separate questionnaires were used to evaluate the performance of individual Directors on parameters such as level of engagement and contribution, objective judgement etc. The Chairman was also evaluated based on the key aspects of his role. The performance evaluation of the Independent Directors was carried out by the entire Board. The performance evaluation of the Chairman and the Non-Independent Directors was carried out by the Independent Directors at their separate meeting. Policy on appointment and remuneration of Directors Pursuant to section 178(3), the Nomination and Remuneration Committee of the Board of the Company has formulated the criteria for Board nominations as well as the policy on remuneration for Directors and employees of the Company. The criteria for Board nominations lays down the qualification norms in terms of personal traits, experience, background and standards for independence besides the positive attributes required for a person to be inducted into the Board of CUMI. Criteria for induction into senior management positions have also been laid down. The Remuneration policy provides the framework for remunerating the members of the Board, Key Managerial Personnel and other employees of the Company. This Policy is guided by the principles and objectives enumerated in Section 178(4) of the Companies Act, 2013 and reflects the remuneration philosophy and principles of the Murugappa Group to ensure reasonableness and sufficiency of remuneration to attract, retain and motivate competent resources, a clear relationship of remuneration to performance and a balance between rewarding short and long-term performance of the Company. The policy lays down broad guidelines for payment of remuneration to Executive and Non-Executive Directors within the limits approved by the shareholders. Further details are available in the Corporate Governance Report. The Board Nomination criteria and Remuneration policy are available on the website of the Company at http://www.cumi-murugappa.com/policies.html. Composition of Audit Committee The Audit Committee of the Board of CUMI comprises only Independent Directors. Mr. T L Palani Kumar is the Chairman and the other members are Mr. M Lakshminarayan, Mr. Sanjay Jayavarthanavelu and Mrs. Bharati Rao, who was inducted during the year. During the year, five Audit Committee Meetings were held, the details of which are provided in the Corporate Governance Report. Statutory Auditors M/s. Deloitte, Haskins & Sells, Chartered Accountants, (FR No.008072S) Chennai were appointed as Auditors of the Company at the 60th Annual General Meeting to hold office upto the conclusion of the 62nd Annual General Meeting, subject to the annual ratification of the appointment by the members. The Auditors have confirmed their eligibility under section 141 of the Companies Act, 2013 and the Rules framed thereunder for the continuation of their term. Further, as required under clause 49 of the Listing Agreement, they have also confirmed that they hold a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India. The Report given by the Auditors on the financial statements of the Company is provided in the financial section of the Annual Report.There are no qualifications, reservations, adverse remarks or disclaimers given by the Auditors in their report. Cost Auditors Pursuant to Section 148 of the Companies Act, 2013 read with Companies (Cost Records and Audit) Rules, your Company is required to maintain cost accounting records under category group 'Inorganic chemicals, organic or inorganic compounds of brcious metals, rare-earth metals of radio element or isotopes, and Organic chemicals' in respect of Electrominerals for FY 2014-15, which is also required to be audited. Your Directors, on the recommendation of the Audit Committee, had appointed M/s. S Mahadevan & Co. (firm no.00007), Cost Accountants, Chennai to audit the cost accounting records maintained by the Company under the said Rules for the FY 2014-15 on a remuneration of " 0.4 million p.a. Further, the said firm has also been appointed to conduct cost audit for the FY 2015-16 on the same remuneration in respect of the product categories applicable to the Company. The Companies Act, 2013 mandates that the remuneration payable to the Cost Auditor is required to be ratified by the members and accordingly a resolution seeking the member's ratification of the remuneration payable to the Cost Auditors is included in the Notice convening the Annual General Meeting. Secretarial Audit M/s R Sridharan & Associates, Practicing Company Secretaries, Chennai was appointed as the Secretarial Auditor to undertake the Secretarial Audit of the Company for the FY 2014-15. The report of the Secretarial Audit is annexed to and forms part of this Report (refer Annexure F). There are no qualifications, reservations, adverse remarks or disclaimers given by the Secretarial Auditor in the Report. Compliance Management The Company's in house compliance management system tracks compliances across the various factories and offices of the Company.This tool has a combrhensive coverage of the various applicable laws and is constantly updated based on the regulatory changes. Corporate Governance As per clause 49(X)(A) of the listing agreement with the stock exchanges, a separate section on corporate governance including the certificate from the Statutory Auditors confirming compliance is annexed and forms an integral part of this Report. CEO/CFO Certificate The Managing Director and the Chief Financial Officer have submitted a certificate to the Board on the financial statements and other matters as required under clause 49(IX) of the listing agreement. Directors' Responsibility Statement Pursuant to the provisions contained in Section 134(3)(c) of the Companies Act, 2013, the Board to the best of its knowledge and belief and according to the information and explanations obtained by it confirm that: ¦ in the brparation of the annual accounts, for the financial year ended 31st March 2015, applicable accounting standards have been followed and no material departures have been made from the same; ¦ the accounting policies mentioned in Note 2 of the Notes to the financial statements have been selected and applied consistently and judgments and estimates that are reasonable and prudent have been made so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit of the Company for that period; ¦ proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Company for brventing and detecting fraud and other irregularities; ¦ the annual accounts have been brpared on a going concern basis; ¦ that internal financial controls to be followed by the Company have been laid down and that such internal financial controls are adequate and operating effectively; ¦ proper systems have been devised to ensure compliance with the provisions of all applicable laws and that such systems are adequate and operating effectively. EXTRACT OF ANNUAL RETURN The extract of the Annual Return in the brscribed form MGT 9 is annexed to and forms part of this Report (refer Annexure E). ENERGY CONSERVATION, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS & OUTGO The information on energy conservation, technology absorption, expenditure incurred on research and development and forex earnings and outgo as required under section 134(3)(m) of the Companies Act, 2013 read with Rule 8 of the Companies (Accounts) Rules, 2014 is annexed to as Annexure B and forms part of this Report. SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE REGULATORS OR COURTS There are no significant and material orders passed by the regulators or courts or tribunals impacting the going concern status of the Company's operations in future. PARTICULARS OF EMPLOYEES The information on employees and other details required to be disclosed under Rule 5 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules 2014 is annexed to and forms part of this Report (refer Annexure C). Further, the information relating to employee stock options as per the applicable Regulations of the Securities and Exchange Board of India is also annexed and forms part of this Report (refer Annexure D). ACKNOWLEDGEMENT The Board gratefully acknowledges the cooperation received from various stakeholders of the Company viz., customers, investors, channel partners, suppliers, government authorities, banks and other business associates during the year. The Board also places on record its sincere apbrciation of all the employees of the Company for their commitment and continued contribution to the Company. On behalf of the Board M M Murugappan Chairman Date : 1st May 2015 Place : Chennai |